Weekly Update 5th July 2019

GBP: BoE governor speaks of “shipwreck”
It was a game of several halves for sterling. Last Friday it was the top-performing major currency. On Tuesday it was the rear. Then on Wednesday and Thursday the pound was just about unchanged against the euro and US dollar. On average it is down by 0.6% on the week against the other ten most actively-traded currencies. UK economic data did it no favours. The second revision to first quarter GDP left growth unchanged at 0.5%. Business investment increased by 0.4% after four quarters of decline that mean it is still down by 1.5% on the year. Purchasing managers’ index readings for manufacturing, construction and services were all weaker than expected, with even the services sector “close to stagnation”.

Sterling’s biggest problem was the pessimistic tone of a speech by the Bank of England governor. Speaking of “growing concerns over the global economic outlook” he said trade tensions have increased the downside risk and Trump’s tariffs could “shipwreck” the global economy.

EUR: IMF’s Lagarde to head European Central Bank
An eventful week left the euro unchanged against sterling. It lost four fifths of a cent to the US dollar. Some, but not all, of the data from the euro zone were more helpful to the euro than those from Britain were to the pound. Germany delivered the strongest services sector PMI and the weakest manufacturing reading. At a political level the picture in Rome lightened when Italian Prime Minister Giuseppe Conte said the budget deficit for this year would be 2.04%, down from the 2.4% previously stated. The improvement will allegedly be achieved by lower spending and higher revenues. If Brussels can be persuaded that the numbers are realistic, the European Commission will likely row back from the punitive fines it has threatened.

Possibly the most important event was the nomination of IMF managing director Christine Lagarde to replace Mario Draghi as president of the European Central Bank. The general view is that she is the “continuity” candidate, sharing Sig. Draghi’s taste for monetary stimulus and a supporter of his “whatever it takes” approach to preserving the euro.

USD: Trump lambasts China, Europe and the Fed
There was a running battle between those investors who think the dollar has strengthened as far as it can and those who believe it has further upward scope. The net result was a draw: it is on average unchanged against the other major currencies. As elsewhere, the US data highlighted the mismatch between the industrial and services sectors of the economy. Industry is increasingly constrained by Trump’s tariffs, as shown by a barely-positive manufacturing PMI while the services sector presses ahead: tariffs have no direct dampening effect on burgers and haircuts.

Initial joy that the US and Chinese had called a truce in the trade war faded quickly when it became apparent that a trade deal was not imminent. There was a setback for the dollar when president launched another of his attacks on China and Europe for “playing [a] big currency manipulation game” and the Federal Reserve for failing to “MATCH, or continue being the dummies who sit back and politely watch”.

CAD: Confused by oil, helped by yield
The Loonie took first place for the week among the majors. It strengthened by one and two thirds of a cent against sterling and added a quarter of a US cent. Some of those gains were the result of oil price expectations; most were the effect of Canada’s relatively high interest rates.

In Vienna OPEC agreed to extend for another nine months its production curbs. The cartel’s power is not what it once was, because North American production of shale oil diminishes the effect of whatever OPEC decides. Although oil prices actually fell after the announcement, production constraints in Saudi and Russia mean less competition for Canada. The Canadian dollar’s real advantage was interest rates. With the US and others leaning towards rate cuts, the Bank of Canada’s 1.75% benchmark and a 10-year government bond yield of 1.46% look attractive in comparison with 10-year yields of 0.67% in Britain, -0.4% in Germany and -0.69% in Switzerland.

AUD: Widely-expected rate cut shrugged off
Considering that the Reserve Bank of Australia lowered its benchmark Cash Rate from 1.25% to 1% the Aussie dollar had a pretty good week. It added a sixth of a US cent and strengthened by a cent and two thirds against the pound. The Australian data told a fairly standard story. Manufacturing is struggling as a result of the trade war and muted activity in China while the services sector is still expanding. Retail sales showed weaker-than-expected 0.1% growth in May, half the forecast increase. New home sales jumped 28.8% in May after falling 11.8% the previous month.

The RBA rate cut had been so widely telegraphed that the event itself was not in doubt, the only question was one of timing; now or later. In its statement the RBA made no suggestion that another cut might be in the pipeline. It simply noted that it will “continue to monitor developments in the labour market closely and adjust monetary policy if needed”.

NZD: Business confidence at 10-year low
Other than the Australian rate move, which inevitably exerted some suction on the Kiwi, the only notable events in the NZ dollar’s week were the NZIER’s Quarterly Survey of Business Opinion and a 13.3% monthly rise in building permits. The QSBO was not particularly flattering to the NZ economy, with “deterioration in demand and sentiment”. Business confidence fell to its lowest level in more than ten years, “with a net 31 percent of businesses expecting a deterioration in general economic conditions over the coming months”. Not surprisingly, sentiment was weakest in the manufacturing sector.

With the world’s investors focusing on yield, the 1.50% return on 10-year NZ government bonds looked attractive in comparison with the opposition. Australian bonds yield 1.28% and most Europeans return less than 1% – some substantially less. The Kiwi therefore had a moderately successful week, losing a fifth of a US cent and strengthening by four fifths of a cent against sterling.

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